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What if FCA remains single?

If there’s a car maker that looks desperate to find a partner it is for sure FCA. Since the merge with Chrysler, Sergio Marchionne’s new goal is to relaunch Alfa Romeo and increase total volume by a lot. But he knows that it will be very hard to achieve it without cost savings or more money. Currently Fiat Chrysler is the carmaker with the highest debt in the industry whereas it has one of the most ambitious product plans in a very short period of time. In other words Fiat needs funds and it must move faster than the big players (VW, Toyota, GM, Renault-Nissan) if it wants to keep its independence. Based on its own reports, the group has cash but it has to decide how to use it considering priorities, and Marchionne perfectly knows that it can’t continue to burn millions of dollars when developing one single product. He explained that in a very interesting presentation at the 1st quarter results meeting and the markets didn’t get it as they understood that FCA is desperate to get married as soon as possible.

What could happen if Marchionne doesn’t find a husband for FCA? GM, the candidate he likes, has rejected the proposal as they believe they can do more by themselves. At the end Mary Barra, GM’s CEO, may not want to disturb the company’s investor with a merge that had already resulted in a very bad marriage back in 2005. At the same time, the very few single candidates don’t have the charming Fiat wants due in part because what Marchionne wants is volume and common platforms/projects. Hence, the remaining Japanese independent car makers, such as Mazda, Mitsubishi and Suzuki may not have the appeal. In Europe PSA flirts with the Chinese, Renault is already engaged with Nissan and Daimler, while BMW has an affair with Toyota. Who else can be? Hyundai and Kia have a great marriage, Ford is doing well alone. Maybe Honda? or a Chinese group?

Products such as the new Jeep Grand Wagoneer (to rival with the Range Rover) could be delayed if FCA doesn’t find a partner.

If FCA doesn’t get married the situation is going to be difficult. The first impact is going to be in the timings as many of the coming products could be delayed. Current cash is generated mostly from North American, Jeep, Maserati and Ferrari divisions. In the meantime Brazil and Argentina operations burn money, and European numbers are back to the break even but at very slow speed. Asian sales don’t take off. The main problem is that the luxury brands profits are not enough to finance Alfa Romeo’s expansion and the big investments the group needs in China and India. Hence, the easiest way to solve this is by delaying the launches of the coming Alfas, Jeeps and Fiats. By doing so, FCA will slow down and won’t be able to achieve its 2018 sales targets. By that time it won’t be large enough to face the competition from its big rivals and its independence could be severely threaten.

Ferrari’s property could also change in case the future plans of FCA require more cash than expected.

Another consequence of remaining single is that the hybrid/electric technology could have to wait more time to be available in a big part of FCA’s range. Fiat Chrysler is one of the few big carmakers that lacks of this technology and based on its plans, it may take a while to be a real feature (the first product to be powered by a hybrid engine is going to be the new Chrysler Town & Country, and it will be launched in early 2016). Without a partner and its money, the low emissions engines issue will become more difficult to deal with, and Fiat may have problems to meet the 2020 European targets. However the biggest effect of not finding a partner would be related to Ferrari. After the IPO, FCA will be the biggest shareholder of Il Cavallino with 80% of the property and for sure it will be the first thing Marchionne will think when his plans start lacking funds. Certainly Ferrari is and will continue to be the goose golden egg. These turbulent scenarios explain Sergio’s urgency.

6 responses to “What if FCA remains single?”

FCA is well-positioned for counter-intuitive and counter-cyclical growth and financial strength, making it better able and likelier to go after non-family-owned GM and/or more attractive to other automakers too?

(a) 2.5 odd billion from ferrari
(b) expanding margins in the booming US market where its brands and individual nameplates are perfectly positioned to take advantage of the move to suv-s, trucks and low gas prices etc
(c) re-financing merger-era exorbitant debt (some at as high as 24% even now) to low rates
(d) small, likely growing, profits from Europe, given the 500X and renegade, and the re-entry into long-ignored segments with the Ageax3
(e) a divestment of Magneti marelli, and/or comau and/or teksid
(f) an over valued dollar, leading to greater euro-profits
(g) continued excellent global sales growth of Jeep, set to accelerate further as the Brazil plant starts exporting (including back to the US? to europe?), as the China plant starts-up at the end of the year, and as the C-SUV joins the sales offering, with the Indian plant too exporting by 2017, all in the context of favourable currency undervaluation of the real, the yuan, the rupee and of course not to forget the turkish lira.
(h) the upcoming assured huge bestseller, the chrysler T&C minivan, in the US and Canada
(i) and…..Alfa Romeo’s first 2-3 models, a lot of whose development-costs are set to be amortized well by the vlumes assured by their respective American Dodge and/or Chrysler siblings, some of which were recently shown to dealers at las vegas.

i.e., FCA will be, unlike most of the rest of the industry (barring Toyota) getting financially healthier over the next few years through to 2018, while the likes of say GM and VW will continue to suffer the effects of an over-reliance on China profits, now already in big decline.

FCA is by definition a counter-intuitive and counter-cyclical firm when compared to the conventional logics applied to auto-industry analysis of other firms. That is due to the peculiar genius of Marchionne and of course the strange combination of premium and mass, american and european and brazilian and yet also utilitarian (Fiat Professional etc) brands and geographies and segments it operates in, unlike any other large autofirm.

IF this is true and likely, then:

an EXOR/Elkann-backed more or less hostile attack on GM is very likely, since GM’s stock-market underperformance is increasing, while FCA’s over-performance will accelerate? In concert with other investors and possibly even current GM shareholders, even possibly the UAW a 9% owner and board-member?

I ANY case longe-term redemption for FCA will require this or one or three other deals (merging, buying or selling) for the RoI and CostOfCapital reasons marchionne elucidated in his famous or rather notorious analyst-presentation.

If they want to make inroads in Asia they should consider a merger with Suzuki, which is huge in India and focuses a lot on small cars (therefore could share development costs with Fiat) or Honda which has huge volume, would give them another premium brand strong in the US, access to advanced electric and hybrid tech and a foothold in Asia as well.

FCA can be successful as a single automaker -if it becomes more focused. Today globally its platforms and models are still too diverse. More internal consolidation is needed, and they are slower to complete that path than most of their competitors.

I don’t see FCA finding a suitable suitor. GM is completelty wrong, both in culture and brand portfolio, smaller companies such as Suzuki or Mazda would make better suitors but are unwilling to give up their independence.

Sergio should take a close look at Ghosn’s alliance strategy, and try to mimic that with companies like Mazda, Honda, Suzuki, Volvo-Geely JLR-Tata and others. Why not even approach VW, now that they have been humbled. They may be more willing to share technology and development costs.

FIAT must go out alone. PSA would make for a great r&d partner–joint development of platforms and powertrains for Europe and globally.
FCA needs help in so many areas with it’s older, heavy platforms acceptable for Jeep but not much else.
The beautiful yet heavy and stretched compact known as the Chrysler 200 is a perfect example of what ails FCA. For future models, there is no reason why FCA can’t with co develop or even strike a deal with a top tier automaker such as Mazda. An unconventional move such as turning the Chrysler brand into a J/V could reduce costs which increasing dealership for traffic.
Selling off Alfa while using it’s intellectual property for Masserati and Dodge would be a smart move, as well.
Long-term, a PSA and FCA merger would be wise. Brands could be combined so that the new company had one global value brand (different badges like Vauxhall and Opel); one semi premium brand; two luxury brands DS and Masserati; plus Jeep and Ram.
Such a firm would dominate Southern Europe, Latin America and thrive in the US.